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Multinational Capital Structure and Tax Competition

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  • Matthias Wrede

    ()
    (Philipps-University Marburg)

Abstract

This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational's affiliate is independent of the jurisdiction's tax rate. Public good provision is either too large or too small. If the formula is predominately based on capital shares and if there is a positive debt externality there is clearly underprovision under formula apportionment.

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File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/34-2009_wrede.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 200934.

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Length: 23 pages
Date of creation: 2009
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:200934

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Keywords: Multinational enterprises; financial policy; profit shifting; corporate taxation; tax competition.;

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  1. Pinto, Santiago M., 2007. "Corporate profit tax, capital mobility, and formula apportionment," Journal of Urban Economics, Elsevier, vol. 62(1), pages 76-102, July.
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